I talk a lot about the opportunity in small banks and I am huge believer in it. We have already been profiting from the bank merger trend for a few years now in the aftermath of the credit crisis and the M&A wave is getting stronger.

Don’t just take my word for it. Below are comments by analysts, journalists, academic and bankers in just the last month. Review these, check out some subscriber reviews and then take advantage of my offer to become a member of Banking on Profits and participate in the trade of the decade with us

Stock price volatility is being driven primarily by events in Europe and in U.S. oil patches, while profitability is well below what the sector experienced in the middle of the past decade and will likely not be returning to those levels anytime soon, John Duffy, vice-chairman of Keefe Bruyette & Woods, said recently at Bank Director’s “Acquire or Be Acquired” conference. He said the M&A topic is on the tongue of practically every community bank CEO. “This really feels like we’re back in M&A,” Duffy said. Duffy believes there are too many banks across the country that do not have a profitable business model and that need to find a partner. There is a bit of a lull in deal-making right now, but Duffy said the issues driving more deals are still present. “The pressure for mergers is as evident as it’s ever been,” he said.

CB Insights February 2015

Matthew S. Sosik, president and CEO of Easthampton Savings Bank, said these challenges are a big reason the region is seeing a “cascade” of mergers and acquisitions. “Banking is a low-margin business, and these challenges are creating a bit of a perfect storm right now,” he said.

Banks are responding by shoring up. Easthampton Savings Bank, for example, did something last year it had never done before — it bought another bank. Greenfield Co-operative Bank and Northampton Cooperative Bank announced plans to consolidate, while others in Hampden and Hampshire counties planned mergers, acquisitions, territorial expansions or contractions through branch closings.

Hampshire Gazette February 2015

What's played out in Tennessee has unfolded on the national scale as well. Research from Washington, D.C.-based Olsen Palmer, a bank M&A advisory and investment bank, found 2014 had the highest volume of bank deals since 2006. There were 293 bank M&A transactions in 2014, up 30 percent from 2013 and triple the amount in 2009, according to the Olsen Palmer report.In its recent report, Olsen Palmer also anticipates continued consolidation in the banking industry.

"Bankers, both commercial and investment, have long been forecasting an imminent and substantial wave of bank M&A activity," Christopher Olsen, the firm's managing partner, writes in the report. "Our forecast has been more measured as we expect a deliberate but certainly pronounced consolidation effort over time rather than a massive but short-lived wave."

Memphis Business Journal February 2015

Although the much-trumpeted surge in bank mergers and acquisitions generally expected over the last few years has not yet occurred, we think investors still need to prepare for a material pickup as industry dynamics still favor increased consolidation but for slightly different drivers than those in the first years after the financial crisis.

Each bank is different, but ultimately community and smaller regional banks depend on solid economic growth in their markets or taking share from competitors to drive net interest income expansion in order to increase profitability. Although some markets are more vibrant than others, our discussions with a number of bank managements indicate banks are largely taking share as opposed to enjoying solid organic growth, which should support increased bank mergers and acquisitions (M&A).

With over 1,000 publicly traded banks, screening for potential targets can be daunting. While each bank may have its own reason to buy or sell, we think a top-down screen should start with geographic segmentation. Our analysis of several macro factors and the banking landscape by state indicate there are several states that appear particularly conducive to consolidation. We view Florida, Pennsylvania, Ohio, North Carolina, Virginia and Puerto Rico as more likely to experience elevated bank M&A than the rest of the country.

Barrons 2015

Following a five-year slowdown in banking sector mergers and acquisitions (M&A), 2015 activity appears to be poised for a rebound across both small and large regional banks

The fact remains that banking M&A activity improved in 2014 – more deals were executed and aggregate deal value improved. Through December 2014, there were 301 deals, more than the 247 for all of 2013. Total deal value in 2014 was $18.6 billion, up from $14.5 billion in 2013 (Figure 1).2 As important, larger deals also were inked in 2014 (e.g., CIT Group/IMB HoldCo at $3.4 billion deal value, BB&T/Susquehanna at $2.5 billion, Banner/ American West at $702 million, First Citizens Bancshares/ First Citizens Bancorporation at $676 million, and Sterling/ Hudson Valley at $538 million).3 As in the previous year, the vast majority of 2014 M&A activity took place at smaller, community banks. Of the 301 deals initiated in 2014, only five had deal value in excess of $500 million, compared to seven deals and four deals in 2012 and 2013, respectively (Figure 2).4 We expect small deals to continue at the increasing level of the past few years, with more deals over $500 million.

Looking ahead, it appears that transaction volume will continue to increase throughout 2015, with large banks continuing to divest and restructure, and more deals in the middle market as capital-rich banks engage in selective acquisitions, small banks consolidate to gain scale, and some specialty providers look to tap into deposits from traditional depositories. As they plan their M&A strategies, bank boards and executives should consider several factors that may impact M&A readiness, execution, and post-deal integration.

Small community banks – generally described as those under $1 billion in assets – are at the epicenter of banking sector M&A, with some in a fight for survival. Many small banks are finding it difficult to fund expansion and/ or capital improvements; are burdened by the cost and effort of regulatory compliance; and are experiencing board fatigue. These institutions recognize that they no longer can “go it alone” – they need economies of scale to survive.

Deloitte 2015 Banking M&A Outlook Poised for a rebound

The year 2014 was a good vintage for bank merger and acquisition deals. According to SNL Financial, there were 288 healthy bank acquisitions last year, which was a big improvement over 2013, when there were 224. So how many are we likely to see in 2015? I think the bank M&A market this year could be even stronger.

I believe the biggest factor that will propel deal flow this year is a continuation of the low interest rate environment that has driven the industry’s new interest margin (which is the difference between a bank’s cost of funds and what it makes off of loans or earns from its securities portfolio) to nearly its lowest point in 36 years. In a presentation today at Bank Director’s Acquire or Be Acquired conference in Scottsdale, Arizona, John Duffy, vice chairman at the investment banking firm Keefe Bruyette & Woods, put up a chart showing that since 2004 the industry’s NIM has been well below the historical average going back to 1978. Over this 11-year stretch, the only year worse than last year was 2004.

Bankspot.com February 2015

The number of small U.S. bank M&A announcements has been growing, and the blockbuster transaction between Royal Bank of Canada and City National Corp. raises some hope that a pickup in big-bank M&A is closer to reality.

In 2014, the number of announced U.S. bank and thrift M&A transactions increased to 294, up 29% from 2013, and the total announced deal value increased to $18.6 billion, up 31% from 2013. The pace of announcements picked up especially in the fourth quarter of 2014, which saw 91 deal announcements, up 42% year over year, while total announced deal value increased to $6.71 billion, up 181% year over year.

The increase in activity has been long awaited. In the aftermath of the credit crisis, many investment banks expected a rise in bank consolidation and beefed up their financial institution groups. But the pace of deal-making was slow to increase with little over 150 bank and thrift M&A deals being announced in 2011.

In 2014, investment bankers said the gradually improving economy and credit quality gave buyers more confidence to offer higher bids, which enticed more sellers to do deals. Indeed, the median price-to-tangible book for U.S. bank and thrift M&A deals stood at 1.33x in 2014, up from 1.22x in 2013 and 1.15x in 2012, according to SNL data.

Hovde Group LLC Director Douglas Hillhouse said the increase in deal agreements was inevitable because M&A catalysts such as lackluster organic growth and increased regulatory costs have been impacting the industry for the last several years. He added that it was just a matter of time before the bid/ask spread was narrowed, whether it came from sellers or buyers changing their stance on pricing."It was really kind of like a game of chicken," he told SNL.

SNL Financial February 2015

H. Rodgin Cohen, 70, is senior chairman at law firm Sullivan & Cromwell. He has advised on nearly every major banking merger over the past 30 years and played a vital role in shaping the rules of banking before and after the financial crisis.

“Today there are four critical areas. Enforcement has become so incredibly ramped up, the penalties so much more severe and the ground rules less and less clear. Second, there are so many regulations with questions about how you interpret and apply them. Third, bank mergers have been moribund but are beginning to show signs of stirring. And the fourth issue that's starting to grab hold is activist investors targeting banks, like [Nelson Peltz's] Trian Partners at Bank of New York Mellon. These activists go in with very small stakes, and then there's what I call the wolf-pack phenomenon, where other institutional investors who support them come in.”

Crains NY Business February 2015

The GAO also found that consolidation has been driven by economies of scale – in line with findings of other recent academic literature.50 Specifically, St. Louis Fed Vice President and Deputy Director of Research David Wheelock and Clemson University economics professor Paul Wilson noted that as early as 2006, banks faced increasing returns to scale – an incentive to 49 U.S. Government Accountability Office, 8. 50 Ibid., 9.17 grow.51 The FDIC also found evidence of economies of scale in banking, particularly above the $100 million threshold, but its pervasiveness is less evident in certain subsectors – particularly for banks engaged in agricultural lending and financing.

A 2014 Mercatus Center at George Mason University survey reported that over one-quarter of community banks (defined as those with less than $10 billion in assets) would hire new compliance or legal personnel in the next 12 months, and that another quarter were unsure about whether they would do so.67 It also found over one-third of banks had already hired new staff in order to meet new CFPB regulations. 68 Another 2014 Minneapolis Fed study highlighted the perilous consequences of regulation-driven hiring at the smallest community banks (those with less than $50 million in assets), which, according to our calculations, in Q2 2014 accounted for 11 percent, or 682, of depository institutions (consolidating at the holding company level). 69 At these institutions, the study found that hiring two additional personnel reduces median profitability by 45 basis points, resulting in one-third of these banks becoming unprofitable

Harvard Kennedy School Of Business Study 2015

Tim: Okay. What attracts you other than obviously your long experience in banking? What attracts you to the community banks space right now?

Ted: Well, we really like the community banks space for a number of reasons. One, it’s very well capitalized now, maybe over-capitalized, the credit quality is good, rising interest rates are certainly going to help this space, part of it, on the stock of community banks and community banks, we will just say for our purpose of it, are micro and small cap banks in that space. And then, so rise in interest rates are going to help community banks in general because almost all of them are very asset sensitive and the last thing is really a pretty big thing, it’s because of mergers and acquisitions, there are now 6700 banks in the country and there’s probably going to be 4500 banks in five or six years. So then, you’re going to see a lot of consolidation in the industry and primarily in community bank space. Last year there are 272 acquisitions in the United States bank acquisitions. I think this year most people are thinking that this year’s going to approach 350, so you’re starting to see a real acceleration in bank consolidation.

Tim: Now, do you attribute this to the rising cost of regulatory compliance because that’s something we talk about a lot that some of these smaller banks just can’t really afford to be independent anymore?

Ted: Well, it’s really a couple of things. Certainly the regulatory is the biggest part of it and the regulators have being, I hate to say, out of control but I’ve been, once again, I was a bank CEO for 28 years and every year it gets worst and worst and worst and I keep saying they’re going to ease up on community banks. They never do. And part of the problem is, they’re trying to punish the large banks but they’re really catching everybody in it. Because the regulators are all over these compliance kind of stuff whether it’s AML, Any Money Laundering Act or Bank Secrecy Act or share lending or whatever, they’re all over, so you’re actually right. There’s going to be a lot of cost there that banks are adding and of course there’s no revenue with those costs. The other things although even though that gets the most attention, really technology is really one of the things that’s going to really start to affect the smaller banks. They’re just not going to have the ability to invest in what they need to invest in. Prime example was Bryn Mawr Trust. At Bryn Mawr Trust we’re pretty good size regional community bank. We had three billion of bank assets in over, and probably almost eight billion of wealth assets, so we’re pretty good size, pretty good revenue and we are spending about a million to a year just on cyber security, nothing but cyber security, no fore proceed, just cyber security. Well, it’s pretty tough to be a small bank. You know, 500 million dollar bank, 600 million dollar bank, and you invest that kind of money in cyber security. So, I think it’s really not only the compliance put on by the regulators but, I think it’s also the technology spending that’s going to affect community banks.

Ted Peters Former CEO of Bryn Mawr Financial (BMTC) and founder of Bluestone Financial Institutions Fund- February 2015

“We’re kind of halfway to where we stated we wanted to be, and we’re continuing to look at ways to get there via organic growth or continued acquisition,” he said.

Along the way, Cascade Bancorp plans to beef up its commercial lending in Salt Lake City, where it acquired a loan production office in the merger, and possibly in Seattle. Expansion into retail banking in Washington could follow, if opportunities arise to merge with another community bank, Zink said.

“We have had conversations with lots of smaller banks. A lot of times they’re just preliminary conversations,” he said. “There’s nothing really that’s in the wind that I can say. Yeah, we’re far down the path here.”

Central Oregon Bulletin February 2015

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